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[panic]
Aug 16, 2000

bounce bounce bounce

Welcome to the long-term investing thread. Here is the place to get suggestions on how to set up your retirement portfolio, or 401k, or IRA. This is not the place for timing the market - if you hint that you might be doing that, forty finance amateurs with attitudes will pile on to beat it out of you. But they will have good information for you so you should listen!

Some of the people who post here have actual financial training but most do not. Some of us are quite cynical about the financial advice industry, some are not. Take any advice with a grain of salt and consider the source.

Holy poo poo this is complicated. I heard there are books I could read but isn't there something quicker?

GoGoGadgetChris posted:

Bernstein (author of Four Pillars) also wrote a short eBook "If You Can": http://www.etf.com/docs/IfYouCan.pdf If You Can is a great primer. It's written specifically for young investors.

For a little more technical stuff,

pig slut lisa posted:

Can we update the OP to include the Stock Series at jlcollinsnh? I feel like telling people "read a whole book" is not always the best way to start them off when they come in with basic questions. Parts I-VI of the Stock Series are especially good for someone who's just beginning their exploration.


How much should I be saving?
This depends totally on your individual goals, age, and risk tolerance. It stands to reason that if you are 22 years old and don't want to retire for 40 years, your needs are going to be different than the poor schmuck that is just starting to save for retirement at 50 years old.

That said, if you are young and fairly new in your career, which you most likely are if you are reading this forum, 10% of your pre-tax salary is an absolute baseline minimum amount that you should be saving. The more aggressively you save on top of that, the better off your long-term financial outlook will be.

Here is a decent calculator to help you run different savings scenarios.

I'm in my early 20s, why do I need to save for retirement?
Saving early in your career is extremely important for a few reasons:

1) It will never be easier to save money than when you are young. You are not married, you don't have kids, you probably don't own a house. If you can't save money now, when will you be able to??

2) Compounding interest is a wonderful thing when it works in your favor. Consider this scenario: Let's say there is a 25 year old kid that is making $50k per year. He starts contributing 10% of his salary to a 401k plan every year, until he retires at 65. Assuming that his salary remains equal to inflation, he will retire at 65 with about $2 million in savings, assuming an average 8% return.

Now let's say that same kid waited until, say, 35 years old. He would need to contribute 50% of his pre-tax income to end up with $2 million. YIKES! It is VITAL to invest when you are young, to avoid such a scenario!

The market is getting killed, shouldn't I wait it out for a while?
NO!! A bear market is the best possible thing for long-term investors! Consider this somewhat-famous Warren Buffet quote:

quote:

To refer to a personal taste of mine, Iím going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ĎHallelujah Chorusí in the Buffett household. When hamburgers go up in price, we weep. For most people, itís the same with everything in life they will be buying ó except stocks. When stocks go down and you can get more for your money, people donít like them anymore.
Investing now means that, in essence, you are buying "on sale". This is a good thing.

Roth IRAs, 401(k)...I'm confused. Where do I start?
There are two basic types of savings accounts -- tax-advantaged, and taxable. Tax-advantaged savings are where you will most likely be doing the grand majority of your savings until later in your career.

There are 3 main types of tax-advantaged savings accounts -- Roth IRA, Traditional IRA, and 401(k) (or equivalent). I could explain all of these in detail, but the Motley Fool has already done a pretty good job right here. In general, most people would want to follow these rules:

1) Contribute to 401(k) up to employer match. Always get the free money!
2) Max out Roth IRA ($5,500 limit in 2015). You can skip this if your 401k options are good and you don't need the extra tax-advantaged space.
3) Max out 401(k) ($18,000 limit for 2015)
4) If you were able to finish Step 3, you will end up rich in all likelihood. Start a taxable savings account, or go out and blow some money at a strip club or something.

And if you've used up all your tax-advantaged space and still want to save more, read the Boglehead wiki page on tax-efficient fund placement!

I have all these different funds to choose from, where do I start?
This is where the fun begins. Vanguard's target retirement funds are a great place to start if you are a passive investor. That said, if you are investing in 401(k), there's a good chance that you will have very limited options. In general, all long-term investors should have some exposure of U.S. equities, international equity, and fixed income. The exact ratios again depend on your age, goals, and risk-tolerance. I am 25 years old and I try to keep to my plan of 45% intl equity/40% US equity/15% fixed income.

Another easy starting place is the so-called Lazy Portfolio - that page actually discusses several different strategies, any of which could be a good starting point (except maybe putting 25% of your portfolio in gold).

If you know what portfolio you want and are trying to make it fit into the lovely options of your work 401k, there are some suggestions in the lazy portfolio section of the Boglehead wiki. There is also a portfolio calculator tool over at Morningstar that you can use to compare your hacked-together portfolio with whatever index you are trying to approximate.

I should get a whole life / universal life insurance policy to keep everything simple, right?
No you shouldn't. Here is a post about how insurance works.

I have time to read an actual book - but which one?

Fundamentals
The Four Pillars of Investing
http://www.amazon.com/Four-Pillars-...o/dp/0071385290

Vanguard Investor Education Pages
https://personal.vanguard.com/us/pl...ation/education

Why Smart People Make Big Money Mistakes
http://www.amazon.com/Smart-People-.../dp/B00150D6KU/

The Bogleheads' Guide to Investing
http://www.amazon.com/Bogleheads-Gu.../dp/1118921283/

Deeper Cuts
Intelligent Investor
http://www.amazon.com/Intelligent-I.../dp/B0002X1JKU/

Stocks for the Long Run
https://personal.vanguard.com/us/pl...ation/education

A Random Walk Down Wall Street
http://www.amazon.com/Random-Walk-D.../dp/0393340740/

The Intelligent Asset Allocator
http://www.amazon.com/The-Intellige...o/dp/0071362363

All About Asset Allocation
http://www.amazon.com/All-About-rear end.../dp/0071700781/

Economic Interest
Devil Take the Hindmost
http://www.amazon.com/Devil-Take-Hi.../dp/0452281806/

Against the Gods
http://www.amazon.com/Against-Gods-.../dp/0471295639/

A Splendid Exchange
http://www.amazon.com/Splendid-Exch.../dp/0871139790/

Somebody fucked around with this message at 20:24 on Mar 14, 2016

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JohnnySavs
Dec 28, 2004

I have all the characteristics of a human being.


Yay! I was contemplating making a thread like this myself.

Any suggestions for good Roth IRA providers for someone that is planning on withdrawing some principle in a few years for, say, a house down payment? I was doing a little research and Oppenheimer seems to have a lot of options, but Vanguard seems to like pushing their low expense ratios. Basically, who's good for general Roth services and doesn't give you a hard time over withdrawals (if this ever happens)?

If they have decent fixed-rate options (CDs, Bonds, what have you) as well, that's a plus. I tend to like to put new money into that while the market is doing lovely or just really volatile.

Mind_Taker
May 7, 2007




Just looking for some opinions on what I currently hold and my approximate allocations:

VFINX - Vanguard 500 Index Fund - 25%
VEXMX - Vanguard Extended Market Index Fund - 25%
VWIGX - Vanguard International Growth Fund - 25%
VEIEX - Vanguard Emerging Markets Stock Index Fund - 25%

I'm 23 years old and don't have any plans for any large purchases (a house, etc.) in the near future. I feel I may be a little too heavy on the emerging markets and am thinking about rebalancing by adding VTRIX soon, but I still want to maintain a 50/50 split between domestic and international equities. My proposed rebalancing would be:

VFINX - 25%
VEXMX - 25%
VWIGX - 20%
VTRIX - 20%
VEIEX - 10%

Does this sound reasonable assuming this money is currently just being saved for retirement?

Bastard Tetris
Apr 27, 2005

L-Shaped



Nap Ghost

VEIEX has been doing incredibly well for me, I wouldn't take anything away from that. I did the domestic/international split with a slight bias towards international equities and it's been pretty positive so far.

Christobevii3
Jul 3, 2006


Is there any point to a 457 plan? It seems you are limited to investments off a list with relatively high expenses. With the required tmrs, i put 1 part in and the city puts 2 parts in, so that is pretty good, 5% of my income is contributed at 15% in reality. But i'm trying to decide how else to save?

I guess $5000 into a roth ira would be best since i'm at a lower income level?

VERTICAL WIPE!
Jul 18, 2003
I'm weird...so forgive me

Christobevii3 posted:

Is there any point to a 457 plan? It seems you are limited to investments off a list with relatively high expenses. With the required tmrs, i put 1 part in and the city puts 2 parts in, so that is pretty good, 5% of my income is contributed at 15% in reality. But i'm trying to decide how else to save?

I guess $5000 into a roth ira would be best since i'm at a lower income level?

The general wisdom is to contribute just enough to your 401(k) or 457 to get the maximum matching that your employer offers.

Then funding a Roth IRA to the max is a good idea. If you think you'll be in a higher tax bracket in the future, a Roth IRA is beneficial because you pay taxes once now, and then you get to take all the money out later tax-free.

If you have any left after that, you can go back and put it in your 457, but like you said, you have limited investment options there.

dysaio
May 1, 2005


Taking compound interest into consideration, does it make sense to max out a Roth IRA each year before paying off debts (school loans, on average 4-5%), or dumping everything into the debts first (3-4 years to get them all paid off)?

Realjones
May 16, 2004


dysaio posted:

Taking compound interest into consideration, does it make sense to max out a Roth IRA each year before paying off debts (school loans, on average 4-5%), or dumping everything into the debts first (3-4 years to get them all paid off)?

Personally, I'm contributing enough to max out the company match on 401k and then overpaying what I can on my loans (also at 5-6%) to get rid of them. For now, I don't think you can do much better than a guaranteed 5% return when the S&P 500 is down over 10% for the year.

[panic]
Aug 16, 2000

bounce bounce bounce

JohnnySavs posted:

Yay! I was contemplating making a thread like this myself.

Any suggestions for good Roth IRA providers for someone that is planning on withdrawing some principle in a few years for, say, a house down payment? I was doing a little research and Oppenheimer seems to have a lot of options, but Vanguard seems to like pushing their low expense ratios. Basically, who's good for general Roth services and doesn't give you a hard time over withdrawals (if this ever happens)?

If they have decent fixed-rate options (CDs, Bonds, what have you) as well, that's a plus. I tend to like to put new money into that while the market is doing lovely or just really volatile.

I don't think that it much matters where you open up your Roth. I used to be with ING, and then switched it over to Vanguard since they provide much better analysis. Oh, and I have a huge hard-on for Vanguard.

That said, I disagree with using a Roth to house income that you will eventually use in a few years for a house. There are a few reasons:

1) Retirement savings should be made separately from savings for other purchases such as a home. Even if you are trying to save for a house, you should ALWAYS put a minimum of 10% of pre-tax income against retirement. Your Roth IRA should not be a short term savings vehicle.

2) Your savings goals are very different for retirement vs. buying a house in a few years. If you are trying to save up for a house, your money should be in CDs, bonds, money market, etc. Long term savings should be mostly equity at this point. Trying to create some type of weird blended portfolio in a Roth is not really going to work for you.

You don't need to be in a huge hurry to buy a house. I know the market looks low right now and it is tempting. But in all honestly renting has a lot of very important, often overlooked benefits that you don't realize until you buy your first place. Be patient, build a good down payment that is independent of your retirement savings, and make sure you have a reasonable emergency fund in place before you make the decision to buy.

[panic] fucked around with this message at 12:13 on Jul 4, 2008

[panic]
Aug 16, 2000

bounce bounce bounce

Mind_Taker posted:

Just looking for some opinions on what I currently hold and my approximate allocations:

VFINX - Vanguard 500 Index Fund - 25%
VEXMX - Vanguard Extended Market Index Fund - 25%
VWIGX - Vanguard International Growth Fund - 25%
VEIEX - Vanguard Emerging Markets Stock Index Fund - 25%

I'm 23 years old and don't have any plans for any large purchases (a house, etc.) in the near future. I feel I may be a little too heavy on the emerging markets and am thinking about rebalancing by adding VTRIX soon, but I still want to maintain a 50/50 split between domestic and international equities. My proposed rebalancing would be:

VFINX - 25%
VEXMX - 25%
VWIGX - 20%
VTRIX - 20%
VEIEX - 10%

Does this sound reasonable assuming this money is currently just being saved for retirement?

That portfolio looks just OK, but I think you can do better. You have been in VWIGX and are considering VTRIX, both of which carry high-ish expense ratios that are twice something like VGTSX, which is the Vanguard Total International Stock Market Index. I just checked the charts and over 5 years, VGTSX has outperformed VTRIX by 20% and VWIGX by 40%. That said, I think you have the right idea with a high international asset allocation.

Personally, I would set up your AA with something like:

VFINX 25%
VEXMX 20%
VGTSX 35%
VEIEX 10%
VBMFX 10%

That gets you a balanced U.S. vs. international allocation, with a slight over-index towards emerging markets, which I still believe is a good play. I also added a small allocation in bonds. Research has shown (though I can't find the drat link at the moment) that this helps mitigate risk over a long-term, while not really having a significant effect on long-term earning power.

Hope this helps!

edit: Here is an awesome link explaining more about Vanguard's international funds in detail.

[panic] fucked around with this message at 16:25 on Jul 4, 2008

palatka
Apr 4, 2003

by Ralp


Is there something I can contribute to in lieu of a 401(k) if I am a 1099 worker?

Edit: To clarify, I plan to contribute more than $5,000 to my retirement this year but of course I can only contribute that much to my Roth IRA. I was wondering if there is some other tax shelter I can set up for my retirement savings.

palatka fucked around with this message at 14:39 on Jul 4, 2008

[panic]
Aug 16, 2000

bounce bounce bounce

palatka posted:

Is there something I can contribute to in lieu of a 401(k) if I am a 1099 worker?

Edit: To clarify, I plan to contribute more than $5,000 to my retirement this year but of course I can only contribute that much to my Roth IRA. I was wondering if there is some other tax shelter I can set up for my retirement savings.

There is a single participant 401(k) plan available for independent contractors. Here is some information you can read up on. If you are interested in going this route, I would recommend calling Vanguard or Fidelity or whoever you would want to set the 401(k) up with, and they should be able to walk you through the process, including which forms need to be filled out and all of that fun stuff.

mcpringles
Jan 26, 2004



Does anyone have any tips for starting up a roth ira? Ideally I'd like to have a mix of different funds, but most of them have some sort of minimum investment and you can only contribute $5,000 per year right?. It seems like it would take 2-3 years before I could have 4 or 5 different funds in my portfolio. I'm just worried about screwing myself over by starting out with just one fund.

[panic]
Aug 16, 2000

bounce bounce bounce

ZeroAX posted:

Does anyone have any tips for starting up a roth ira? Ideally I'd like to have a mix of different funds, but most of them have some sort of minimum investment and you can only contribute $5,000 per year right?. It seems like it would take 2-3 years before I could have 4 or 5 different funds in my portfolio. I'm just worried about screwing myself over by starting out with just one fund.

There are plenty of very good funds in which you could invest that will keep you fully diversified up until whatever point you have enough money banked to start slicing and dicing on your own. I know that I sound like a total shill for Vanguard in this thread, but their Target Retirement funds are a really great place to start. They definitely aren't the only company that offers these types of funds, but they have the lowest fees. That said, I think they under-index on international, so they aren't perfect. You might be able to find something with a better mix by hunting around, but early in your career I believe it is just more important that you are saving with a decent asset allocation, rather than trying too hard to slice and dice your way to the perfect portfolio.

Unormal
Nov 16, 2004

Mod sass? This evening?! But the cakes aren't ready! THE CAKES!

Fun Shoe

Here's some reading recommendations:

Fundamentals

The Four Pillars of Investing
http://www.amazon.com/Four-Pillars-...o/dp/0071385290

Vanguard Investor Education Pages
https://personal.vanguard.com/us/pl...ation/education

Why Smart People Make Big Money Mistakes
http://www.amazon.com/Smart-People-...ref=pd_sim_b_45



Deeper Cuts

Intelligent Investor
http://www.amazon.com/Intelligent-I...ref=pd_sim_b_39

Stocks for the Long Run
https://personal.vanguard.com/us/pl...ation/education

A Random Walk Down Wall Street
http://www.amazon.com/Random-Walk-D...ref=pd_sim_b_23

The Intelligent Asset Allocator
http://www.amazon.com/Intelligent-A...29645913&sr=8-1

All About Asset Allocation
http://www.amazon.com/About-Asset-A...29645934&sr=1-1



Economic Interest

Devil Take the Hindmost
http://www.amazon.com/Devil-Take-Hi...ref=pd_sim_b_41

Against the Gods
http://www.amazon.com/Against-Gods-.../ref=pd_sim_b_1

A Splendid Exchange
http://www.amazon.com/Splendid-Exch...15291970&sr=1-4

edit: Fixed links for those so amazingly lazy they can't copy/paste into Amazon. (i.e. goons)

Unormal fucked around with this message at 00:22 on Dec 19, 2008

mcpringles
Jan 26, 2004



[panic] posted:

There are plenty of very good funds in which you could invest that will keep you fully diversified up until whatever point you have enough money banked to start slicing and dicing on your own. I know that I sound like a total shill for Vanguard in this thread, but their Target Retirement funds are a really great place to start. They definitely aren't the only company that offers these types of funds, but they have the lowest fees. That said, I think they under-index on international, so they aren't perfect. You might be able to find something with a better mix by hunting around, but early in your career I believe it is just more important that you are saving with a decent asset allocation, rather than trying too hard to slice and dice your way to the perfect portfolio.

Thanks, thats a good idea.

I just remembered I have a Roth IRA with Schwab that has about $4,000 that my grandpa set up for me many years ago. I wanted to set up a Vangaurd account and roll over my old roth ira into it. When I try to set this up I get a message saying "Your financial institution won't move your holdings directly into Vanguard funds. You'll need to sell your assets and move them into cash or a money market prior to the transfer. Contact a Vanguard associate at 800-669-8623 for help. We'll set up a conference call with you and your current financial institution to start the transfer."

Is this going to trigger additional tax liability/penalties for selling off my ira instead of rolling it over?

VERTICAL WIPE!
Jul 18, 2003
I'm weird...so forgive me

ZeroAX posted:

Thanks, thats a good idea.

I just remembered I have a Roth IRA with Schwab that has about $4,000 that my grandpa set up for me many years ago. I wanted to set up a Vangaurd account and roll over my old roth ira into it. When I try to set this up I get a message saying "Your financial institution won't move your holdings directly into Vanguard funds. You'll need to sell your assets and move them into cash or a money market prior to the transfer. Contact a Vanguard associate at 800-669-8623 for help. We'll set up a conference call with you and your current financial institution to start the transfer."

Is this going to trigger additional tax liability/penalties for selling off my ira instead of rolling it over?

I'm not sure, but it looks like they're saying that maybe Vanguard can't hold the funds you currently have with Schwab. It sounds like you can still roll it over, but you have the sell the funds first. This could have tax implications -- I'm not sure -- but at least you won't be withdrawing the money and facing penalties for that.

Of course, you'll probably want to check with Vanguard for the details. I'm just guessing here.

80k
Jul 3, 2004

careful!

VERTICAL WIPE! posted:

I'm not sure, but it looks like they're saying that maybe Vanguard can't hold the funds you currently have with Schwab. It sounds like you can still roll it over, but you have the sell the funds first. This could have tax implications -- I'm not sure -- but at least you won't be withdrawing the money and facing penalties for that.

Of course, you'll probably want to check with Vanguard for the details. I'm just guessing here.

No, it seems pretty clear that he is not trying to move his fund shares over "in kind", but wants them going into Vanguard funds. So it has nothing to do with the funds that he is holding at Schwab.

This is a Schwab policy, and not a Vanguard one (Vanguard simply knows that Schwab has this policy and is letting you know). Vanguard would be perfectly happy to send instructions to Schwab to liquidate the funds and transfer the money to Vanguard to be invested into Vanguard funds. However, Schwab doesn't like those types of instructions, and would prefer that the client put in a sell-order to sell his fund shares, have it go into the cash settlement account, and THEN have instructions to transfer the money over to Vanguard.

I have had this issue before (Fidelity used to let me stay invested until the day Vanguard asks for the transfer, but now Fidelity wants their clients to sell first, and then initiate the transfer). It is no big deal. There are no tax liabilities involved here. You sell the funds, and it goes into a cash settlement account, but it's all done under the shelter of your IRA, and is not a taxable event.

80k fucked around with this message at 03:00 on Jul 6, 2008

VERTICAL WIPE!
Jul 18, 2003
I'm weird...so forgive me

80k posted:

No, it seems pretty clear that he is not trying to move his fund shares over "in kind", but wants them going into Vanguard funds. So it has nothing to do with the funds that he is holding at Schwab.

This is a Schwab policy, and not a Vanguard one (Vanguard simply knows that Schwab has this policy and is letting you know). Vanguard would be perfectly happy to send instructions to Schwab to liquidate the funds and transfer the money to Vanguard to be invested into Vanguard funds. However, Schwab doesn't like those types of instructions, and would prefer that the client put in a sell-order to sell his fund shares, have it go into the cash settlement account, and THEN have instructions to transfer the money over to Vanguard.

I have had this issue before (Fidelity used to let me stay invested until the day Vanguard asks for the transfer, but now Fidelity wants their clients to sell first, and then initiate the transfer). It is no big deal. There are no tax liabilities involved here. You sell the funds, and it goes into a cash settlement account, but it's all done under the shelter of your IRA, and is not a taxable event.

Thanks for clearing this up.

Invicta{HOG}, M.D.
Jan 16, 2002


My portfolio is pretty typical for long-term strategy in early career (mix of growth/value, mix of large/small cap, mix of domestic and international). I don't have any emerging market funds and using the Yahoo! mutual fund tool and searching by morningstar ratings, load, etc. the top funds are either closed or not available through Schwab. I've seen the Vanguard index here, but does anyone have recommendations either for other general emerging markets funds or for one that focuses on India/China/Russia +/- Brazil? It's just a small amount (this year's Roth) but I want to fully diversify!

Unormal
Nov 16, 2004

Mod sass? This evening?! But the cakes aren't ready! THE CAKES!

Fun Shoe

Invicta{HOG}, M.D. posted:

My portfolio is pretty typical for long-term strategy in early career (mix of growth/value, mix of large/small cap, mix of domestic and international). I don't have any emerging market funds and using the Yahoo! mutual fund tool and searching by morningstar ratings, load, etc. the top funds are either closed or not available through Schwab. I've seen the Vanguard index here, but does anyone have recommendations either for other general emerging markets funds or for one that focuses on India/China/Russia +/- Brazil? It's just a small amount (this year's Roth) but I want to fully diversify!

I think Vanguard's Emerging Markets Index fund is a good, cheap fund to use if you want to just add EM. Do you have a reason for not using it?

If you're looking for slightly off-the-basic indexes to take a look at you could take a look at GUR, GWX and TRAMX which invest in emerging Europe, intl. small cap and Africa and Middle East respectively.

Unormal fucked around with this message at 14:59 on Jul 9, 2008

DJCobol
May 16, 2003

CALL OF DUTY!


Grimey Drawer

I'm an idiot when it comes to anything financially other than a savings account. I currently contribute 6% pretax to a company matched (max match is 6%, so I'm maxed out) Principal 401(k). When I signed up for it, I picked my retirement year, and the funds "are automatically moved around for maximum return". I'm sure later I'll get into what I'm actually investing in, but not right now. What I'm interested in now is supplementing that retirement account with a Roth IRA. If I'm reading correctly, I can take a max of $5k a year and contribute that to a Roth IRA, and then much like my 401(k), choose where to invest it. Is that correct? Is there anything else that I should be doing? Are there caps to how much you can contribute overall (I make $50k a year, so 6% pretax and if I put in $5k in a Roth, that would be a total of 16% yearly)?

VERTICAL WIPE!
Jul 18, 2003
I'm weird...so forgive me

Sympathetic Wasp posted:

I'm an idiot when it comes to anything financially other than a savings account. I currently contribute 6% pretax to a company matched (max match is 6%, so I'm maxed out) Principal 401(k). When I signed up for it, I picked my retirement year, and the funds "are automatically moved around for maximum return". I'm sure later I'll get into what I'm actually investing in, but not right now. What I'm interested in now is supplementing that retirement account with a Roth IRA. If I'm reading correctly, I can take a max of $5k a year and contribute that to a Roth IRA, and then much like my 401(k), choose where to invest it. Is that correct? Is there anything else that I should be doing? Are there caps to how much you can contribute overall (I make $50k a year, so 6% pretax and if I put in $5k in a Roth, that would be a total of 16% yearly)?

You definitely seem to be on right track so don't sell yourself short.

You're exactly right about the Roth IRA - it's a retirement account that you open on your own and fund yourself (Up to $5,000 a year for 2008)

The annual limit for contributing to your 401(k) is $15,500 (for 2008). You are contributing 6% to get the max company match, which is good, but you have room to contribute more if you want to.

Here's the usual advice for how to save your money for retirement:

Step 1. Fund 401(k) up to max company matching levels (you've got this down)
Step 2. Fund Roth IRA to the yearly max
Step 3. For additional savings, go back and increase 401(k) funding

Don't think of the 6% as a limit. Think of it more like a floor. Any less than that is dumb because you'd be missing out on free money. If you put more than 6% in, you won't get matching funds, but you will save more, which is key.

Here's a link from the Motley Fool which goes through the basics of retirement saving really well in my opinion: http://www.fool.com/Retirement/Retirement01.htm

abagofcheetos
Oct 29, 2003

by FactsAreUseless


For those that advocate index fund portfolios, is there any reason why you wouldn't simply select all 2x or 3x or 100x (I guess they don't exist... yet) bull funds instead of just the regular indexes?

-tito-
Feb 6, 2004
The Dirty Mexican

IF I may ask, what is the point of going back to your 401(k) plan after maxing out your employer match on your 401(k) and then maxing out your Roth IRA? Most 401(k) plans offer limited fund selections (easier to administer) that have higher loads or fees than other available options.

Why wouldn't you want to go to a taxable fund with infinite investment choices, easier access to your assets in case of a need for withdrawal or change, as well as being to choose a company that gives you the information you need. I, personally, like having access to my money without having to take a loan or having to prove financial hardship in case I have to tap my assets. I know there are tax advantages but you are significantly limiting yourself in options in most cases. Perhaps your personal investment choices could not beat the pre-tax gains but I see it as a toss-up (my 401(k) is administered by a large company and it only has 1 index fund for example).

Also, I think a lot of people of a younger demographic realize the need to be self-reliant in old age and are starting to enroll in 401(k) plans and Roths but then will put 0-20% (if they are lucky) down on a home and be stuck paying interest their whole lives. Does your $5000 a year into a Roth really offset hundreds of thousands of dollars in interest you pay on mortgages?

I'm looking at buying a cheap 1 bedroom condo in a good area with 40-50% down that I could immediately rent out for more than the payments and then continuing the cycle while still investing ~16% of my gross salary. This alone will save almost 90K in interest over the life of the loan. I don't exactly make a grand salary but I am frugal.

Ravarek
Apr 24, 2004

Solid gold dipes:
E'ry day I'm hustlin'.


abagofcheetos posted:

For those that advocate index fund portfolios, is there any reason why you wouldn't simply select all 2x or 3x or 100x (I guess they don't exist... yet) bull funds instead of just the regular indexes?

This is actually a drat good question. I second this question.

[panic]
Aug 16, 2000

bounce bounce bounce

-tito- posted:

IF I may ask, what is the point of going back to your 401(k) plan after maxing out your employer match on your 401(k) and then maxing out your Roth IRA? Most 401(k) plans offer limited fund selections (easier to administer) that have higher loads or fees than other available options.

Why wouldn't you want to go to a taxable fund with infinite investment choices, easier access to your assets in case of a need for withdrawal or change, as well as being to choose a company that gives you the information you need. I, personally, like having access to my money without having to take a loan or having to prove financial hardship in case I have to tap my assets. I know there are tax advantages but you are significantly limiting yourself in options in most cases. Perhaps your personal investment choices could not beat the pre-tax gains but I see it as a toss-up (my 401(k) is administered by a large company and it only has 1 index fund for example).

It kind of depends on your tax bracket and 401k options. I would personally argue that the tax savings are worth the hit on ideal asset allocation for most 401k funds. If I was an active trader, there's no way I would be in a 401k beyond the match. But usually, a 401k has at least 1 or 2 funds that are *not bad*, and you can use the rest of your savings to compliment those choices.

quote:

Also, I think a lot of people of a younger demographic realize the need to be self-reliant in old age and are starting to enroll in 401(k) plans and Roths but then will put 0-20% (if they are lucky) down on a home and be stuck paying interest their whole lives. Does your $5000 a year into a Roth really offset hundreds of thousands of dollars in interest you pay on mortgages?

I'm looking at buying a cheap 1 bedroom condo in a good area with 40-50% down that I could immediately rent out for more than the payments and then continuing the cycle while still investing ~16% of my gross salary. This alone will save almost 90K in interest over the life of the loan. I don't exactly make a grand salary but I am frugal.

Again, it comes to tax savings and your own personal situation. Let's say you can get a mortgage for 6%. Now let's estimate the tax deduction on mortgage interest reduces the effective rate to something like 4%. Yes, you are paying 4% interest (net of tax savings), but there is a very high likelihood that you can get a better return by saving in a 401k or Roth.

In addition (and more importantly), investment vehicles like a Roth are only available up until a certain income limit, and only allow for a very limited investment each year. Therefore, it is extremely important that you take advantage of these programs while you can. There are no catch-up contributions for a 25 year old.

Finally, while you personally are able to get 50% down on a condo, this is just not feasible for a lot of young workers. In many cities, this would cost at least $75. If you work for 7-8 years to save that money, you have missed out on the most important retirement savings years of your life and you will work that much harder to save for retirement going forward than the kid that started at 22.

Unormal
Nov 16, 2004

Mod sass? This evening?! But the cakes aren't ready! THE CAKES!

Fun Shoe

abagofcheetos posted:

For those that advocate index fund portfolios, is there any reason why you wouldn't simply select all 2x or 3x or 100x (I guess they don't exist... yet) bull funds instead of just the regular indexes?

For one, the expense ratios and fees of that sort of fund tend to be very high.

You're also exposing yourself to alot of downside risk from leverage. Very young index investors might want an equity exposure over 100%, but most people in most situations will want less than 100% equity exposure.

[panic]
Aug 16, 2000

bounce bounce bounce

abagofcheetos posted:

For those that advocate index fund portfolios, is there any reason why you wouldn't simply select all 2x or 3x or 100x (I guess they don't exist... yet) bull funds instead of just the regular indexes?

Personally, I want to be aggressive but not suicidal. Even at 26, I carry 15% bonds and fixed income. Not to mention that, being the load/fee hater that I am, swallowing a 1.5%+ expense ratio is not acceptable. To me, the risk and expenses are just not worth the extra return, when I know that staying on the path I am on will already lead to an early and lucrative retirement.

abagofcheetos
Oct 29, 2003

by FactsAreUseless


[panic] posted:

Personally, I want to be aggressive but not suicidal. Even at 26, I carry 15% bonds and fixed income. Not to mention that, being the load/fee hater that I am, swallowing a 1.5%+ expense ratio is not acceptable. To me, the risk and expenses are just not worth the extra return, when I know that staying on the path I am on will already lead to an early and lucrative retirement.
The expense ratios may be high but that is just relative, if you are making double return who cares if you are paying a percent or two in expenses.

And I don't know what risk you are talking about that isn't already inherent in index investing. You are either going to make or lose double your investment. I thought the point of long term index investing is that it is the most efficient and best suited to give you good returns. If that is the case, why wouldn't you want double the action?

Unormal
Nov 16, 2004

Mod sass? This evening?! But the cakes aren't ready! THE CAKES!

Fun Shoe

abagofcheetos posted:

The expense ratios may be high but that is just relative, if you are making double return who cares if you are paying a percent or two in expenses.

And I don't know what risk you are talking about that isn't already inherent in index investing. You are either going to make or lose double your investment. I thought the point of long term index investing is that it is the most efficient and best suited to give you good returns. If that is the case, why wouldn't you want double the action?

Cause even in a 2x fund, a 50% drop should wipe you totally out if the fund is really leveraged 2x. The market loses 50% pretty frequently, in terms of an investment lifetime.

You don't get double the upside without double the downside, regardless of what the prospectus tries to tell you. Either you're leveraged 2:1, or you're not. If you are, a 50% drop is margin calls all the way to 0, baby... or close enough that you're pretty screwed.

You can come back from a drop of 50%, but not a drop to 0.

I guess what you're missing is that you can't just fluctuate between +2x and -2x. As soon as you can't collateralize your leverage, the bank pulls your other funds in a 'margin call'. So if you go down to -1x or so, you're done, your collateralized safety margin is used up. So if you could just close your eyes and let it ride, it makes sense like you say, but the reality is that noone will continue to lend you the leverage when you're already so underwater that you can't pay it back.

Someone else can probably say this in a much simpler way.

(also the expense ratios and fees are more like 10-20x what a good broad-index fund would be, not 2x)

Unormal fucked around with this message at 03:57 on Jul 10, 2008

80k
Jul 3, 2004

careful!

A 2x index ETF has double the daily return, which means you can expect high volatility. This does not mean you will get 2x the longterm return of the index. Do a google search to get a better understanding on the effect that volatility has on compounding. If you're lucky, you'll find some academic papers with nice charts and tables.

This makes these ETF's attractive as a trading vehicle, but not necessarily attractive to a buy-and-hold longterm index fund investor.

In fact, over both short and long periods of time, occasionally you will see an ultra 2x index ETF actually underperform the index during a period where the index had a positive return.

So the reason I don't advocate it is not because of conservatism (it's not my place to say whether a >100% equity portfolio is too risky for you, though i know it is too risky for me). It's simply that the added downside risk is very easy to understand, but the expected compensation (over the longterm) is not. Double the downside is something that can and will happen while holding these funds, and that is precisely the type of risk that we demand a premium for. The actual longterm compensation (relative to a standard index fund) is, on average, closer to about 1.4x, if i remember correctly, though it varies quite a bit depending on the time period.

80k fucked around with this message at 04:37 on Jul 10, 2008

-tito-
Feb 6, 2004
The Dirty Mexican

[panic] posted:

It kind of depends on your tax bracket and 401k options. I would personally argue that the tax savings are worth the hit on ideal asset allocation for most 401k funds. If I was an active trader, there's no way I would be in a 401k beyond the match. But usually, a 401k has at least 1 or 2 funds that are *not bad*, and you can use the rest of your savings to compliment those choices.


Again, it comes to tax savings and your own personal situation. Let's say you can get a mortgage for 6%. Now let's estimate the tax deduction on mortgage interest reduces the effective rate to something like 4%. Yes, you are paying 4% interest (net of tax savings), but there is a very high likelihood that you can get a better return by saving in a 401k or Roth.

In addition (and more importantly), investment vehicles like a Roth are only available up until a certain income limit, and only allow for a very limited investment each year. Therefore, it is extremely important that you take advantage of these programs while you can. There are no catch-up contributions for a 25 year old.

Finally, while you personally are able to get 50% down on a condo, this is just not feasible for a lot of young workers. In many cities, this would cost at least $75. If you work for 7-8 years to save that money, you have missed out on the most important retirement savings years of your life and you will work that much harder to save for retirement going forward than the kid that started at 22.

You bring up some great points [panic]. Personally, I started at 17 so I have a bit of a headstart due to a lot of work. I think young workers can save up a significant amount very quickly if they made some simple choices (understandably not always feasible) early in their stable employment, such as not getting a new car right out of college, not buying every toy in sight, and so on (not preaching extreme frugality here by any means). Thanks for the discussion!

abagofcheetos
Oct 29, 2003

by FactsAreUseless


Interesting, thanks for the info. I knew that actual 2x performance wasn't realistic, but I didn't realize they were structured in a way that totally kills the long term performance. I wonder if there was a way to adjust these funds to be more long-term friendly, as opposed to for day trading?

Strict 9
Jun 20, 2001

by Y Kant Ozma Post


I'd appreciate some discussion on Roth versus Traditional IRA's. I almost started funding a Roth just because it seemed like, ever since they came around, that's the only option people consider.

But I'm not sure if it makes sense in my case, for a few reasons. I went to graduate school and was lucky enough to have a good paying job right out of college. My wife has a job too, so we're solidly in the 25% tax bracket. We have pretty much nothing we can write off (no house, no kids, no education bills), so we had something like $10,000 in taxes, which just seems awfully high to me.

Also, how am I supposed to determine my income during retirement? I have no clue what my cost of living will be 2050.

So I can't help but wonder if it would make sense to knock our taxable income down $5000 by contributing to a traditional IRA, and then when we do have a house and kids and are in a lower tax bracket, switch to contributing to a Roth.

Kobayashi
Aug 13, 2004

by Nyc_Tattoo


VERTICAL WIPE! posted:

Step 1. Fund 401(k) up to max company matching levels (you've got this down)
Step 2. Fund Roth IRA to the yearly max
Step 3. For additional savings, go back and increase 401(k) funding

Oh now this is interesting. I'm doing steps 1 and 3, which is to say, I am maxing out my 401(k). I only receive matching funds up to 5%, though. Should I go ahead and scale back my 401(k) contributions immediately and contribute the difference to the Roth, or should I just do it properly next year?

(I had planned to fund a Roth this year, but I sometimes get upset at myself that I can't save cash for my emergency fund AND max out my retirement vehicles AND overpay my student loans AND live in a nice location AND...)

80k
Jul 3, 2004

careful!

abagofcheetos posted:

Interesting, thanks for the info. I knew that actual 2x performance wasn't realistic, but I didn't realize they were structured in a way that totally kills the long term performance. I wonder if there was a way to adjust these funds to be more long-term friendly, as opposed to for day trading?

Not really. You might be able to reduce the effect of constant leverage (google "constant leverage trap"), since it's possible for individuals to adopt margin investing strategies without constant leverage. However, the main problem with these leveraged products is the effect that volatility has on compounded returns. There is just no way around it.

Imagine a fund company that promises double the index return over a 10-year holding period. It would be a ludicrous product for them to offer, since the chance of a negative nominal index return over a 10-year span is very small. So the investor would bear practically no incremental risk for the promise of double the return. In order to fairly share the risk of leveraged investing, it needs to be experienced on a continuous basis. As such, the effect of volatility on compounding cannot be avoided.

This is why Proshares can promise double the index daily return, but it is impossible for them to promise anything in regards to a period of time longer than one day.

edit: I'm not necessarily saying that leveraged investing is to be completely avoided. I just don't see how an ETF or fund can structure one to benefit longterm buy-and-holders (rather than the trading and hedging tools that they are currently used for).

80k fucked around with this message at 17:01 on Jul 10, 2008

-tito-
Feb 6, 2004
The Dirty Mexican

What does the collective group think about traditional 401(k) versus Roth 401(k) options? I have an option for both at my work. The max employer match is 6% (plus an additional 4% gratis) but that can be split however I choose to invest. I can, potentially, invest in both at the same time. There is no difference in the funds; merely the pre and post-tax treatment.

What I was thinking of doing is switching my contributions from my traditional 401(k) to the Roth 401(k). That way I have a balance of both. Additionally, I could couple the Roth 401(k) with a regular Roth IRA and get double the benefit. That is assuming the tax environment 40 years from now will be at a higher rate than is now (highly likely I believe).

One last thing, I've also read various reports that call into question that one will need 80+% of your current income during retirement. During retirement your taxes generally go down, you have a paid off residence (hopefully), a simpler lifestyle, and so forth. These reports also assume Social Security will still be around, that inflation hasn't eaten away 50% of your portfolio, and you made smart medical choices and are still covered relatively inexpensively.

Thoughts?

80k
Jul 3, 2004

careful!

-tito-,
regarding the roth vs traditional 401(k), keep in mind that your company matching will be done on a pre-tax basis, regardless of whether you choose roth or traditional. So if you want to have a bit of both, you will in fact have both even if you put all your contributions into a Roth 401(k), since your employer's contributions are going into a traditional 401(k).

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VERTICAL WIPE!
Jul 18, 2003
I'm weird...so forgive me

Kobayashi posted:

Oh now this is interesting. I'm doing steps 1 and 3, which is to say, I am maxing out my 401(k). I only receive matching funds up to 5%, though. Should I go ahead and scale back my 401(k) contributions immediately and contribute the difference to the Roth, or should I just do it properly next year?

(I had planned to fund a Roth this year, but I sometimes get upset at myself that I can't save cash for my emergency fund AND max out my retirement vehicles AND overpay my student loans AND live in a nice location AND...)

I think personal finance experts love Roth IRAs because of the tax benefits that are especially apparent for younger, poorer people. If I'm making 10, 20 or 30 grand a year now, I'm pretty sure my tax bracket will be higher when I'm older, and I will benefit from the Roth.

So, I don't know if it's worth it for you to re-configure things this year. But I'm pretty sure you have until April 2009 to make Roth contributions for 2008 so that's something to think about as well.

Edit: In a Roth IRA you have total control of how your money is invested, whereas in a 401(k), you're limited to their fund choices. Just one more thing to factor in.

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